FIRST DIVISION

[G.R. No. 149420. October 8, 2003]

SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.
D E C I S I O N
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of steel scaffoldings,
while petitioner Sonny L. Lo, doing business under the name and style Sans Enterprises, is a building
contractor. On February 22, 1990, petitioner ordered scaffolding equipments from respondent worth
P540,425.80.
[1]
He paid a downpayment in the amount of P150,000.00. The balance was made payable in ten
monthly installments.
Respondent delivered the scaffoldings to petitioner.
[2]
Petitioner was able to pay the first two monthly
installments. His business, however, encountered financial difficulties and he was unable to settle his obligation to
respondent despite oral and written demands made against him.
[3]

On October 11, 1990, petitioner and respondent executed a Deed of Assignment,
[4]
whereby petitioner
assigned to respondent his receivables in the amount of P335,462.14 from Jomero Realty Corporation. Pertinent
portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house located at Greenmeadow
Avenue, Quezon City owned by Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR purchased on account
scaffolding equipments from the ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for the purchase of the
aforementioned scaffoldings now in the amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two
and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five Thousand Four Hundred Sixty
Two and 14/100 Pesos (P335,462.14), Philippine Currency which represents part of the ASSIGNORs collectible
from Jomero Realty Corp., said ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles
amounting to the said amount of P335, 462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full power and authority to
demand, collect, receive, compound, compromise and give acquittance for the same or any part thereof, and in
the name and stead of the said ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its successors and assigns that said
debt is justly owing and due to the ASSIGNOR for Jomero Realty Corporation and that said ASSIGNOR has not done
and will not cause anything to be done to diminish or discharge said debt, or delay or to prevent the ASSIGNEE, its
successors or assigns, from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or
assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably necessary to
effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance with the true
intent and meaning of these presents. xxx
[5]
(Italics supplied)
However, when respondent tried to collect the said credit from Jomero Realty Corporation, the latter refused
to honor the Deed of Assignment because it claimed that petitioner was also indebted to it.
[6]
On November 26,
1990, respondent sent a letter
[7]
to petitioner demanding payment of his obligation, but petitioner refused to pay
claiming that his obligation had been extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money against the
petitioner before the Regional Trial Court of Makati, Branch 147, which was docketed as Civil Case No. 91-074.
[8]

During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of
Assignment of credit. Respondent, for its part, presented the testimony of its employee, Almeda Baaga, who
testified that Jomero Realty refused to honor the assignment of credit because it claimed that petitioner had an
outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision
[9]
dismissing the complaint on the ground that the
assignment of credit extinguished the obligation. The decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the defendant and against
the plaintiff, dismissing the complaint and ordering the plaintiff to pay the defendant attorneys fees in the amount
of P25,000.00.
Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court rendered a
decision,
[10]
the dispositive portion of which reads:
WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision and enters judgment ordering
defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM PHILIPPINES, INC. Three
Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per
annum from January 10, 1991 (filing of the Complaint) until fully paid and attorneys fees equivalent to 10% of the
amount due and costs of the suit.
SO ORDERED.
[11]

In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the respondent,
the Court of Appeals held that (1) petitioner failed to comply with his warranty under the Deed; (2) the object of
the Deed did not exist at the time of the transaction, rendering it void pursuant to Article 1409 of the Civil Code;
and (3) petitioner violated the terms of the Deed of Assignment when he failed to execute and do all acts and
deeds as shall be necessary to effectually enable the respondent to recover the collectibles.
[12]

Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court of
Appeals.
[13]

In this petition for review, petitioner assigns the following errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN DECLARING THE DEED OF ASSIGNMENT
(EXH. 4) AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ASSIGNMENT (EXH. 4)
DID NOT EXTINGUISH PETITIONERS OBLIGATION ON THE WRONG NOTION THAT PETITIONER FAILED TO
COMPLY WITH HIS WARRANTY THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE TRIAL COURT AND IN
ORDERING PAYMENT OF INTERESTS AND ATTORNEYS FEES.
[14]

The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a
legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers
his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could enforce it against the debtor.
[15]

Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt.
[16]
In order that there be a valid dation in
payment, the following are the requisites: (1) There must be the performance of the prestation in lieu of payment
(animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a credit against the third
person; (2) There must be some difference between the prestation due and that which is given in substitution
(aliud pro alio); (3) There must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from that due.
[17]
The
undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the debtors debt. As such, the vendor in good
faith shall be responsible, for the existence and legality of the credit at the time of the sale but not for the solvency
of the debtor, in specified circumstances.
[18]

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal
property,
[19]
produced the effects of a dation in payment which may extinguish the obligation.
[20]
However, as in
any other contract of sale, the vendor or assignor is bound by certain warranties. More specifically, the first
paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale,
unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly
stipulated or unless the insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and legality of
the credit at the time of the sale or assignment. When Jomero claimed that it was no longer indebted to petitioner
since the latter also had an unpaid obligation to it, it essentially meant that its obligation to petitioner has been
extinguished by compensation.
[21]
In other words, respondent alleged the non-existence of the credit and asserted
its claim to petitioners warranty under the assignment. Therefore, it behooved on petitioner to make good its
warranty and paid the obligation.
Furthermore, we find that petitioner breached his obligation under the Deed of Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or
assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably necessary to
effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance with the true
intent and meaning of these presents.
[22]
(underscoring ours)
Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the
performance thereof in case the same is later found to be inexistent. He should be held liable to pay to
respondent the amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of
P335,462.14 with legal interest thereon. However, we find that the award by the Court of Appeals of attorneys
fees is without factual basis. No evidence or testimony was presented to substantiate this claim. Attorneys fees,
being in the nature of actual damages, must be duly substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19, 2001 in CA-G.R. CV
No. 47713, ordering petitioner to pay respondent the sum of P335,462.14 with legal interest of 6% per annum
from January 10, 1991 until fully paid is AFFIRMED with MODIFICATION. Upon finality of this Decision, the rate of
legal interest shall be 12% per annum, inasmuch as the obligation shall thereafter become equivalent to a
forbearance of credit.
[23]
The award of attorneys fees is DELETED for lack of evidentiary basis.
SO ORDERED.